The dip in the economic growth rate to 5.7% in Q1 2017-18 has sent alarm bells ringing despite being explained away as the effect of demonetization - by the opposition - & an inventory destocking exercise in preparation for the onset of GST on 1st July - by the ruling party. Ideally, restocking of counters should happen in Q2 in anticipation of the Diwali season falling in Oct this year, but the teething effect of GST implementation - as has been the case worldwide of leading to a hockey stick curve growth pattern, a dip initially followed by rapid growth - is likely to be replicated in India too. Agricultural growth in Q2 is likely to be low considering the high base effect of 4.1% for the same quarter of last year. Exporters are seeking a Rs 65000 crore refund which if delayed would deteriorate their working capital requirements leading to a cascading effect of a drop in exports.
Against the above background are listed the possible solutions for revival.
Short term :
(a)Drop taxes on fuel to ensure more disposable surplus in the hands of the common man to drive immediate consumption; the consequent drop in govt. revenues could be made up by increasing the custom duty on crude currently at zero. Thankfully petroleum is not under GST & hence this change shall not impede the GST roll out process.
(b)Drive stalled projects completion since it is a low hanging fruit.
(c)While repo rate is at 6%, the lending rates are at 11-18%. Instead of pushing the RBI to drop the repo rate further, prompting PSU banks to drop their lending premiums & drive greater access to the MSME sector shall be in order. The repo rate drops announced by the RBI have not seen "transmission" by the banking system reeling under high NPA's since they need to get returns from a lower quantum of assets which is akin to "Lazy banking".
Large corporates - with a debt overhang & capacity utilization trending at 74% - are unlikely to go for fresh investments. Ambitious industrialists in sectors which have high capacity utilization are likely to look at buying distressed assets - available in plenty now - rather than go for a brownfield expansion.
Large corporates - with a debt overhang & capacity utilization trending at 74% - are unlikely to go for fresh investments. Ambitious industrialists in sectors which have high capacity utilization are likely to look at buying distressed assets - available in plenty now - rather than go for a brownfield expansion.
It must be noted that while there was an record FDI of $60 billion into India last year, $18 billion was repatriated - a sign of low confidence - & the repatriations have increased since 2013-14 when it was $5.2 billion. If growth is not accelerating but actually dipping sequentially since the last 6 quarters is it because FDI is being employed to buy existing capacities rather than creating new ones?
Medium Term:
(a) With stock market above the 30,000 mark, accelerate divestments. Contain political opposition to the act who could potentially launch a propaganda that the govt. is selling family silver with the argument that all the disinvestment proceeds shall flow into an SPV to be used for capital reinvestment & hence it is a case of one asset being sold to create another with the bonus of additional employment. This has deliberately been put under a medium term plan since there is a time lag between planning for divestment, actual disinvestment & making the project "shovel ready".
(b)Use the Chinese model of investment acceleration by the PSUs, during an economic trough, as a counter-cyclical measure; Indian PSU chiefs though are unlikely to listen to their political masters in their last year in office if they foresee that the current dispensation is unlikely to return to power.
(c)Focus on exports: Exports dropped from $314 billion in 2013-14 to $276 billion in 2016-17. Of the $38 billion drop, $31.5 billion is petroleum products which is understandable but the $2 billion drop each in rice (when our granaries are overflowing), yarn/fabrics/handlooms & electronics is not. Likewise, the $1.3 billion drop in leather & meat exports indicates the pernicious effect of cow vigilantism which needs to be addressed. Sectoral & geographic targeting, therefore, both in the economic & social sphere shall be helpful.
Long term:
(a)Indian savings rate has been dropping continuously from a high of 36.9% of GDP in 2007-08 to about 31% in 2016-17. With an incremental capital to output ratio of 4 - which in simple words means we need Rs 4/- of additional capital to produce Rs 1/- of output - India shall theoretically trend at a maximum GDP growth rate of about 7.5% unless we increase the savings rate or increase productivity or both.
(b)M&A of PSU banks, capital infusion & NPA rationalization. Some analysts have recommended bank recapitalization beyond Project :Indradhanush" - that envisaged Rs 0.70 Lakh crores infusion by the govt. into state run banks even as they raise fresh equity of 1.1 lakh crores from the market during a 4 year period starting 2015 - betting on the "multiplier effect" of increased bank lending. However, considering the current anemic single digit credit growth & low utilization levels, recapitalization beyond subscribing to the Basel III norms might not be helpful; public investment rather than recapitalization might be a more prudent strategy.
Conclusion:
These strategies shall drive 3 of the 4 levers of growth: Public investment (divestment & pushing proceeds into infrastructure); Private consumption (vide fuel price drop) & Exports(Geographic & sectoral focus) even while private investment - the last lever - takes time to get back on track; after all, demand generation by the other 3 levers would increase capacity utilization prompting private investment; an increase in investment by local industrialists would subsequently prompt more of the foreigners to follow suit.
